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Thursday, February 2, 2023

Banks Impairment Charges up 39% to N186.41bn on Economic Pressures

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Banks’ provision for bad losses also known as impairment charges have risen significantly, which is a reflection of the weakening fundamentals of the economy as rising interest rates are set to precipitate loan delinquency.

The results compiled by MoneyCentral showed that the impairment charges of the 10 largest banks that have released nine months’ financial statements increased by 38.91 percent to N186.41 billion from N134.20 billion as at September 2021.

The banks were: Access Bank Plc; Fidelity Bank Plc; FBN Holdings Plc; Guaranty Trust Holding Company (GTCO) Plc; Sterling Bank Plc; Stanbic IBTC Holdings Plc; United Bank for Africa Plc; Union Bank for Africa Plc; Unity Bank Plc; Wema Bank Plc and Zenith Bank Plc.

“A high interest rate environment is a recipe for loan delinquency, so as lending rates rises, it is expected that banks proactively make higher impairment charges in the form of both specific and collective provisions on their portfolios,” said Abiola Rasaq, former head of investor relations at United Bank for Africa Plc.

“It is important for banks to continue to proactively and prudently provision for expected credit losses, especially as unforeseen spikes in impairment charges may expose capital ratios. Whilst the industry remains well capitalised at 13 percent BASEL ratio level, weaker Naira may further weigh on capital ratio in the quarters ahead,” said Abiola.

Drilling down into the numbers shows the combined charge was down 9.39 percent in 2021, as the relaxation of lockdown policy imposed by the government to curb the spread of the coronavirus and roll out of vaccines underpinned business activities that accelerated economic rebound and paved the way for customers to meet their obligations.

Interestingly, loan loss expense on financial assets or the charge surged by 66.87 percent in 2020, a year that the pandemic paralyzed business activities and the country slipped into a recession for the second time in five years.

An impairment charge is the writing off of worthless goodwill. It refers to assets that are no longer of the same value as they were in a prior period.

Analysts say the impact of naira devaluation and relative FX supply shortages has ballooned lenders’ debt service and potentially impair borrowers’ ability to effectively meet obligations as at when due.

The ones that had lent money to firms such as airlines in foreign currencies are more exposed to deteriorating asset quality.

The ones that had lent money to firms such as airlines in foreign currencies are more exposed to deteriorating asset quality.

Of course, slow economic growth and the hawkish tone by the Central Bank of Nigeria (CBN) mimicking peers across the globe in hiking interest rates to tame rising inflation will even make it difficult for companies who are seeing higher interest rates on money borrowed to honor their obligations.

The monetary policy rate (MPR) has been increased to 16.5 percent from 15.5 percent in line with Broadstreet analysts’ consensus and the International Monetary Fund, IMF, expectation in a fight to curb the worsening consumer price index.

Nigeria’s Gross Domestic Product Report for Q3 2022 released by the National Bureau of Statistics (NBS) showed that the economy grew by 2.25 per cent (year-on-year) in real terms in the third quarter of 2022 as against 4.03 per cent reported in the same period of 2021.

According to the nation’s statistics body, the decline was attributable to the base effects of the recession and the challenging economic conditions that impeded productive activities.

But banks are not in a precarious situation as far as asset quality is concerned as a lot of them had diversified loan portfolio across sectors supports asset quality, in aftermath of the exposure to oil and gas sector of 2016 where a precipitous drop in the price of crude oil tipped the country in its first recession in 25 years in 2016.

Zenith Bank’s non-performing-loans (NPLs) 4.40 percent as at September 2022, though less than the 5 percent threshold, is higher than the 4.20 percent in 2021.

The Bank’s NPLs in absolute figure hit N175.90 billion, which is 19.82 percent higher than 2021’s N146.80 billion.

The lender’s foreign currency loans (FCY) to the oil and gas has stood at N852.33 billion or $1.95 billion, which is 50.30 percent of the total loan portfolio.

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